BEFORE THE 

SURFACE TRANSPORTATION BOARD 

_________________________________ 

STB EX PARTE NO. 646 

RAIL RATE CHALLENGES IN SMALL CASES 

______________________________________ 

COMMENTS OF THE 

U.S. DEPARTMENT OF AGRICULTURE 

_____________________________________ 

Bill Hawks 

 Under Secretary 

 Marketing and Regulatory Programs 

 U.S. Department of Agriculture 

 Washington, D.C. 20250 

Date: July 21, 2004 
2

AUTHORITY AND INTEREST

 The Secretary of Agriculture is charged with the responsibility under the Agricultural 

Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to represent the interests of 

agricultural producers and shippers in improving transportation services and facilities by, among 

other things, initiating and participating in Surface Transportation Board (Board) proceedings 

involving rates, charges, tariffs, practices, and services. 

BACKGROUND

 The purpose of this public hearing is to provide a forum for the continued discussion of 

proposals regarding the Board’s processing of railroad rate challenges in small cases that are not 

suitable for handling under constrained market pricing (CMP) procedures. The Board has noted 

that even though it has provided simplified guidelines for seeking rate relief in those cases where 

its standard rate guidelines would be too costly or infeasible, it continues to hear from smaller 

rail customers that its procedures are still impractical for the limited amounts of traffic that they 

ship. 

 The Board held an initial public hearing on April 22, 2003, to hear suggestions from 

interested parties. At the request of Chairman Nober, 17 of the commenting shipper 

organizations identified their common recommendations and submitted a joint proposal to the 

Board on July 11, 2003. 

 The Department of Agriculture (USDA) thanks the Board for initiating these public 

hearings and supports productive dialogue on this issue that is of great significance to 

agricultural shippers. USDA commends the combined comments of the 17 shipper organizations 
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on July 11, 2003, and the testimonies of agricultural representatives and the other shippers on 

April 22, 2003. These comments have been thoughtfully prepared and provide excellent 

information as to why the Board’s current simplified rate appeal procedures are not perceived as 

cost-effective. USDA urges the Board to develop a process for handling rate appeals for small 

cases that is cost-effective, well-defined and fair, and transparent. 

SHIPPERS NEED COST-EFFECTIVE APPEALS PROCEDURES

 The ability of agricultural shippers to appeal excessive rail rates is particularly important 

for agricultural producers because of the characteristics of the market in which they operate. 

Due to their numbers (many), size (small), and the nature of their products (homogeneous with 

many substitutes) individual agricultural producers of grain and oilseed crops are considered 

“price-takers.” That is, they have little or no ability to influence the price they receive for their 

products, and therefore, are unable to pass increases in costs forward to buyers of their products. 

Instead, these individual agricultural producers tend to absorb any cost increases because of their 

lack of market power. Consequently, increases in transportation costs typically result in 

decreased producer incomes as individual producers absorb the increased transportation cost. In 

turn, lower producer incomes can adversely affect the ability of individual producers to borrow 

funds, potentially reducing economic prosperity in rural areas. Higher transportation costs may 

also hinder the competitive position of U.S. agricultural products in highly competitive export 

markets. 

Transportation costs for agricultural products are large relative to crop value, often 

exceeding 40 percent of the final delivered price of the grain. Tariff rates on approximately 30 
4

percent of farm product shipments exceed the jurisdictional threshold, which is a revenue-tovariable cost (R/VC) ratio of 180 percent. In regions of the country that are highly dependent 

upon rail service, many agricultural shippers consider their rail rates to be excessive because the 

R/VC ratio is much higher—sometimes exceeding 300 percent—than the 180 percent 

jurisdictional threshold. 

 Despite extremely high rail rates, agricultural producers in captive regions perceive that 

they have no cost-effective access to regulatory relief. The Board currently provides two 

methods for shippers to challenge rail rates: the Constrained Market Pricing (CMP) guidelines 

or the simplified rate appeal procedures. 

 CMP involves the creation of a hypothetical railroad to haul the product on which the rate 

is being contested. The CMP process is cumbersome, expensive, and time consuming. A rail 

customer filing a rate complaint at the Board can expect to spend over $2 million and wait 

several years for a final decision, according to grain shipper associations. In its February 1999 

study, Railroad Regulation: Current Issues with the Rate Relief Process, the General Accounting 

Office (GAO) found that the 41 rate complaints reviewed by the GAO cost shippers from about 

$500,000 to $3 million and required a few months to about 16 years to resolve through the rate 

complaint process. Consequently, CMP has been most successful when used by energy 

companies to appeal rates on large-quantity coal movements between one origin and one 

destination. 

 CMP is not considered feasible for rate appeals by agricultural shippers because, 

in contrast with coal movements, agricultural production is geographically disperse. That 
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is to say, agricultural firms typically ship much smaller quantities (compared to coal 

shippers) of varied crops to many destinations. Rate appeals using CMP procedures 

become extremely complex and expensive as multiple hypothetical origin-destination 

pairs and commodities are added to the rate appeal. 

 Due to the excessive costs and duration of CMP rate proceedings, the Board developed 

simplified rate appeal procedures for non-coal shippers. The simplified rate appeal procedures, 

however, have not been used for many reasons, as previous shipper testimony in this hearing has 

indicated. One key factor inhibiting the use of the simplified procedures is that shippers are 

uncertain how the Board will apply these appeal procedures. The Board may evaluate the rate 

challenge under the simplified procedures based on the three revenue-cost measures, but shippers 

do not know in advance which method the Board will use. Another reason inhibiting the use of 

these procedures is that to be able to use the simplified rate appeal procedures, shippers must 

first persuade the Board that CMP would not be cost-effective. Thus, shippers must incur costs 

of developing a modified CMP challenge to be granted the use of the simplified appeals 

procedure. As a result, the Board’s simplified rate appeal procedures are impractical for those 

shipping limited amounts. 
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USDA RECOMMENDATIONS

 USDA agrees that the Board should continue to use the following principles articulated 

by the Department of Transportation to guide their efforts in developing effective procedures for 

handling small rate appeal cases: 

“The Board has had several fundamental goals when considering how best to handle 

cases involving small shippers. The first is to identify a more simple analysis than CMP 

in order to provide meaningful regulatory access. The second is to enable railroads to 

differentially price their services according to the demand characteristics of the traffic. 

The third is to protect captive shippers from bearing an undue share of railroad revenue 

requirements.” 1

 For the Board to achieve these goals, USDA believes that the rate appeals process for 

small cases must be cost-effective, well-defined, and transparent to all parties. 

Cost effective. The costs of appealing apparently excessive rail rates should be 

commensurate with the stakes involved. At the present time, the procedures for a simplified rail 

rate appeal are heavily weighted in favor of the rail carrier because the potential cost of the 

appeal appears to be much higher than the potential benefits to any single shipper. 

Consequently, shippers conclude that they have little or no practical access to regulatory relief. 

 As discussed in previous shipper testimonies, the Board has the authority to adopt some 

simplified procedures that could reduce the shipper cost of pursuing regulatory relief. In other 

cases, the Board may need to request appropriate legislation from Congress. USDA urges the 

Board to greatly reduce the shipper cost of pursuing a small rate appeal by: 

• Adopting simplified procedures that reduce the cost of appealing rail rates; 

 

1 STB Ex Parte No. 646, Rate Challenges in Small Cases, U.S. Department of Transportation 

comments, April 16, 2003. 
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• Adopting procedures that minimize the amount of legal representation a shipper 

appealing rail rates requires; 

• Providing a shipper contemplating a small rate case relevant information from the 

confidential waybill so the shipper could assess the merits of its case; and 

• Encouraging the consolidation of rate challenges for multiple origin-destination pairs or 

commodities. 

USDA recommends that the Board adopt simplified rate appeal procedures that reduce 

the cost of appealing rail rates. One way to accomplish this could involve requiring the railroad 

to prove that the CMP appeals process is economically feasible for the small rate case. For small 

rate cases, it seems intuitive that the potential shipper benefit (including the consideration of risk 

and the probability of winning the appeal) would be less than the $2-plus million required for the 

CMP process. As previous shipper testimonies have indicated, placing the burden of proof on 

the shipper has denied shippers practical access to regulatory relief. It would appear that if 

insurmountable barriers are erected to obtain regulatory relief, the rail rates in question are more 

susceptible to perceptions of being unjustifiably excessive. 

Similarly, the Board could require rail carriers to prove the lack of market dominance (at 

least in the very smallest cases) rather than requiring shippers to prove the presence of market 

dominance. If 70 percent of farm product shipments have R/VC ratios less than 180 percent 

(thus removing those rates from challenge and review by the Board), conceivably the remaining 

30 percent of farm shipments may be subject to considerable market power by the railroads. In 

contrast to CMP procedures that often result in rail rates at or slightly above the jurisdictional 

R/VC threshold of 180 percent, shippers that use the simplified rate appeal procedures are apt to 
8

end up with rates substantially above the 180 percent threshold. Consequently, shippers using 

the Board’s simplified rate appeal procedures are not likely to appeal rail rates unless the 

revenue-to-variable cost ratio is well above 180 percent.2

USDA recommends that the Board simplify the small case rate appeal procedures to 

minimize the amount of legal representation that a shipper appealing rail rates requires. As 

discussed in previous shipper testimony, this could be accomplished by limiting the amount of 

discovery allowed, expediting the rate appeals process, and making use of administrative law 

judges. The cost of a small rate appeal is perceived to greatly exceed its benefit because of the 

complexity of the current procedures. 

The presence of a feasible and cost-effective small case rate appeal procedure would also 

encourage the use of mediation, which the Association of American Railroads recommended in 

its testimony. While USDA is highly supportive of alternative dispute resolution measures such 

as mediation, USDA opposes mandatory mediation unless shippers have access to cost-effective 

small case rate appeal procedures. 

USDA further recommends that the Board provide a shipper, who is contemplating filing 

a small rate case, relevant information from the confidential waybill sample. USDA 

recommends that the Board explore current technology to allow access to this data by creating a 

query program that is web-accessible by shippers. The query program should be designed to 

assist a shipper in assessing the merits of its potential rate case. An alternative method might 

 

2

 The Board publishes on a quarterly basis the R/VCRSAM for each major railroad. This is one of 

the three R/VC measures used in the simplified appeals process and has a lower value and a higher 

value. The lower value typically exceeds 220 while the higher value often exceeds 260. 
9

include the Board performing a shipper-requested analysis of the data. The advantage of these 

methods is that essential data confidentiality would be preserved. 

USDA recommends that the Board adopt procedures, where possible, that encourage 

shippers to appeal rail rates for several commodities and numerous routes in the same small case. 

Small case rail rate appeals procedures should fit the characteristics of small shippers, who 

typically ship numerous commodities over many origin-destination pairs. With current 

procedures, many apparently excessive rates cannot be appealed because few origin-destination 

pairs for a commodity have enough traffic for an appeal to be cost-effective. Rate appeal 

procedures that require separate appeals for each commodity and origin-destination pair are not 

cost-effective for the small shipper and limit the shipper’s access to regulatory relief. 

Well-defined and Transparent. Previous testimony provided by shippers urges the 

development and use of a “bright-line standard” to determine a shipper’s eligibility for a small 

case rate appeal as well as objective, straightforward procedures that provide greater 

predictability regarding the outcome of the appeal. 

USDA recommends that the Board develop such a standard of eligibility for filing a small 

rate case based upon the potential dollar amount of benefits if the shipper prevails in a case. The 

dollar amount chosen for this standard, adjusted annually to reflect inflation, should be set high 

enough to allow the realization of actual or positive net benefits relative to the cost of pursuing 

the appeal if the shipper were to prevail. Eligibility for a small rate case should not be based on 

the size of the shipper, but rather the value that is being contested. 
10

USDA recommends that the Board establish transparent and straightforward procedures 

that provide greater predictability regarding the outcome of the appeal. Previous shipper 

testimony in the hearing indicates general confusion as to how the Board will apply and weigh 

the three revenue-to-variable cost ratios used in the simplified rate appeals procedure. This 

uncertainty creates an unacceptable level of risk and discourages shippers from appealing 

apparently excessive rail rates. 

CONCLUSION

USDA thanks the Board for initiating these public hearings on an issue that is important 

to agricultural shippers. Previous shipper comments in this hearing have been thoughtfully 

prepared to articulate why the Board’s current simplified rate appeals procedures are not 

perceived as cost-effective for agricultural shippers. USDA urges the Board to develop a process 

for handling rate appeals for small cases that is cost-effective, well-defined, and transparent. 

 Respectively submitted, 

 

 Bill Hawks 

 Under Secretary 

 Marketing and Regulatory Programs 

 U.S. Department of Agriculture 

 Washington, D.C. 20250